Royal Mail looks likely to be the next victim of FTSE reshuffle

Helal Miah, investment research analyst at The Share Centre, makes his predictions on possible movers in next week’s FTSE reshuffle.

Article updated: 30 November 2018 at 2:00pm Author: Helal Miah

Possible candidate likely to drop out of the FTSE 100 is British institution Royal Mail as the share price takes a rollercoaster ride this year

The prime candidate to replace Royal Mail is insurance group Hiscox

Companies exposed to the UK market, specifically those exposed to the UK housing market, remain those most at risk of relegation

The next FTSE reshuffle is due to take place soon with the cut-off dates for valuation being on the market close on the 4th of December. The selloff in the market since October and the divergent performances of UK focussed and non-UK focussed stocks amongst the Brexit shenanigans is likely to be reflected amongst the promotion and relegation candidates.

The next FTSE reshuffle is due to take place soon with the cut-off dates for valuation being on the market close on the 4th of December. The selloff in the market since October and the divergent performances of UK focussed and non-UK focussed stocks amongst the Brexit shenanigans is likely to be reflected amongst the promotion and relegation candidates.

Who could go down?

At this moment in time and with the unlikelihood of a sharp recovery in the share price between now and December the 4th, Royal Mail is almost certain to drop out of the main index having only been promoted earlier this year showing the roller coaster ride the shares have taken. They rose to as high as £6.30 in May and have slipped back sharply with the real damage being done after the shock unscheduled trading update in October which sent the shares plunging in excess of 20%. This came about as it seems the new CEO Rico Black wants to start his tenure with a clean slate and his statement informed the market that letter volumes were facing a steeper than anticipated decline while productivity performance and cost savings fell way short of plans, thus the management downgraded expectations for the full year operating profits to £500-£550m whereas the previous year they generated £694m.

Its UK parcels business is doing well and the European GLS delivery service is growing at a rapid rate, but competition in the sector is hot. The structural shift to online shopping is the longer term driver, but we are unlikely to see a material rise in the share price between now and the 4th of December especially as the latest Black Friday shopping event, which could have provided a spur, suggests that sales were lower than last year despite higher volumes.

Who's on their way up?

The prime candidate to replace Royal Mail is insurance group Hiscox whom many UK investors may be aware of given that they do have a retail presence. Their retail unit is their largest with premium growth in the third quarter of 16.8% while premiums for the group as a whole rose by 14.3% as their Lloyds of London presence and reinsurance units also delivered double digit growth. However, given the number of natural disasters lately including the hurricanes and storms making landfall on the US east coast and in Japan, management have warned that claims will be rising. However, like all good insurance companies, they have modelled this into their numbers and have taken precautions regarding Brexit, assuming the worst case scenario, they have spent $15m on preparing the whole organisation and opened a European subsidiary.

Hiscox shares have recovered well since the October selloff putting them in prime position to replace Royal Mail but hot on their heels are Spirax-Sarco Engineering who supply steam related, pumps and electrical thermal products to industry and manufacturers.

While there are unlikely to be any more changes between the FTSE 100 and FTSE 250 at this reshuffle, we note companies in danger of being relegated in future reshuffles are those exposed to the UK market, including well-known retailers and those exposed to the UK housing market while those pushing for promotion are more internationally exposed and this to us is a clear reflection of the political climate as investors lose confidence in the UK while overseas businesses remain somewhat immune to Brexit with earnings enhanced by a weaker sterling. Indeed some of these companies such Meggitt and AVEVA may get promoted before the next reshuffle to replace Randgold Resources and Shire who are subject to M&A activity.

This week we have seen a further plunge in the shares of Thomas Cook group as the company produced a second profit warning following the effects of this summer’s heatwave and suspended its dividend. The bad news may not end there for the former FTSE100 company who now face the prospect of getting kicked out of the second tier FTSE250 index.

It will definitely be worth keeping an eye on the noted company prices over the next few days to see if anything changes.

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read ourInvestment Research Policy.

Helal Miah

Investment Research Analyst

Helal has spent time as an independent proprietary trader, trading the US equity futures market. He has also helped manage private client, institutional, retail and hedge funds. His qualifications include the Securities Institute Diploma and the Investment Management Certificate.

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